FDI In Retail – What Does the Government’s Own Data Say? Shankar Gopalakrishnan

In his budget speech, Finance Minister Pranab Mukherjee declared that the government’s “decision” to allow FDI in multi-brand retail outlets “has been held in abeyance” until there is a “broad based consensus.” In other words, it’s already a decision, but it’s just being held back until the government feels it can go ahead safely. The question though is: why is the government so convinced of its decision? How does Mr. Mukherjee so firmly declare that “organised retail helps in reducing costs of intermediation… benefiting both consumers and producers”? Has the government done the homework to justify its actions? This note looks at the government’s own data to find out.

As far as is known, there was only one study commissioned by the government in this regard (Business Standard 2007) This was done by ICRIER in 2007, first published as a Working Paper in 2008 (Joseph et al 2008), and subsequently converted into a book – Retail in India: A Critical Assessment – in 2009, with one chapter added by other authors.[i]

What does ICRIER’s study actually say? The study is useful in two ways. First, buried within it is useful information. Second, it is marked throughout by selection problems, statistical errors and poor sampling. Indeed, it is an in depth demonstration of the kind of systematic bias and logical fallacies that mark the claims of the government.

In order to see this, however, some basic realities must be kept in mind Not all “consumers”, “farmers” or “stores” are the same. Each of these categories includes a vast diversity of people, ranging from some of India’s wealthiest and most powerful families to a large number of the poorest and most marginalised Moreover, the wealthy and powerful members not only do not have the same interests as the rest; their interests are often mutually opposed. Obviously, if any reform is going to actually reduce poverty or contribute to development, it can’t just benefit those at the top of each of these categories; doing so may in fact harm the interests of other classes. But there are enough indicators that corporate retail in India is likely to do precisely that.

Benefits to “Farmers”

The government and its supporters claim FDI in retail will lead to greater benefits for “farmers.” But which “farmers” do they mean? The ICRIER study surveyed precisely 157 farmers, in exactly one area (near Hoskote in Karnataka), selling exactly one crop (cauliflowers). If this is not enough to tell one how unrepresentative this sample is, Table 1 contains some other comparisons that establish the class character of the sample.

This is not to mention that the majority of marginal and small farmers in India do not mainly produce cash crops for the market; they produce for their own consumption and sell whatever surplus exists. Clearly, then, we are dealing with a well off and totally atypical group of farmers.

Even within this group of farmers, though, the study finds that those associated with corporate retail were typically those with higher assets. Those selling to the corporate retailers were found to have more land, more assets (all those supplying corporate retailers had four wheelers), and more loans from banks. The farmers selling to corporate retailers through their “consolidators” had the highest production costs. Though the study recorded higher profits for this narrow segment (the elite within the elite, so to speak), it noted that “some farmers.. reported having received a price lower than what was promised.”

If this is true even within this well off, homogenous, and market oriented group of farmers, we can imagine what the results will be for the majority of cultivators in India. Clearly, as established by most studies of contract farming (the predominant method of procurement for corporate retailers), small and marginal producers have difficulty selling to this supply chain, and this difficulty increases over time as the corporates narrow down to the large growers. Those attempting to do so face widespread abuses. Existing contract farming in India – contrary to the media cheerleading it is receiving – has already revealed such abuses. The very same Pepsi company, which is now being lauded in the press, defaulted on its contracts in Punjab when the market was in a glut (Singh 2004) and included clauses in its contract that permitted it to decline to buy produce even if the produce met all specifications; but farmers would be penalised if they failed to sell (Singh 2005). In Andhra Pradesh, corporates tended to initially have lax contract conditions to draw in farmers and then tightened the conditions over time (Dev and Rao 2005).

Indeed, the ICRIER study itself – despite its overwhelming cheerleading for corporate retail – comes to the conclusion that, “The solution does not lie in doing away with the mandi completely. It lies in making the mandi more efficient and in enforcing laws that are already in place to protect farmers’ interests.… Allowing only private players to exist is at the risk of collusion between all organised retailers. Such a situation again leaves the farmer with no alternative.” (p 179 – 180, ICRIER 2009). Has there been any sign of the government doing any of this? In what sense, therefore, is it arguing that corporate retail is going to be beneficial for “farmers”?

One might note that after it came to power in 2004, the UPA government and its Congress counterpart in AP had set up commissions on farmers with much fanfare. Both gave extensive, detailed reports. Though they varied vastly in approach – and the national commission was sharply criticised – neither said a single word about opening the retail sector to FDI as the way forward for helping “farmers.” Most of their real recommendations have been ignored.

Impact on Unorganised Sector Retailers

The government (and the ICRIER study) engage in a schizophrenic argument on the question of whether or not corporate retailers will impact unorganised sector ones. While constantly repeating that corporate retail will “transform India’s economy”, they simultaneously project that the “impact” of the small number of existing corporate retailers – which, by their own admission, have hardly transformed anything – can simply be projected forward in time to say that there will be no major impact at all. The most important fact that this ignores is precisely the much touted “transformation of the supply chain” that corporate retail will bring with it. For instance, in some countries, the rise of corporate retail supply chains has effectively extinguished the existence of traditional wholesalers (NALEDI 2001); they also permit the corporate retailers to transfer risks of lower demand and the costs of discounts and product promotions on to farmers[ii]. All this, of course, impinges on the ability of non-corporate retailers, especially small ones, to compete. But ICRIER and the government steadfastly ignore this.

A particularly glaring example of this kind of circular reasoning is the ICRIER study’s claim (repeated by some media outlets) that the “impact of organised retail houses on unorganised sector retailers weakens over time.” How do they reach this conclusion? By studying profits, employment and turnover over time, one might think. But that is not what ICRIER did. What they did instead was to look at other retailers near newly established corporate retailers, and found that they suffered more than those near older corporate retailers. This is hardly a surprising finding – obviously, rates of loss will decline over time in those outlets that survive; the starting point will be lower in the case of those who already suffered losses, and those who suffered the highest losses will have closed down. Thus, by definition, any sample of retailers near an older corporate retailer will tend to show lower impacts than those near a newer one. Yet what should be obvious is here taken as proof of the conclusion.

Did ICRIER then estimate closure rates, one might ask? Yes, they did, by asking people to remember which stores had closed. This remarkably unreliable method is used to come up with small figures for closure rates. Indeed, in chapter 2 of its book, ICRIER (2009) refers to international literature showing high closure rates in several countries – but then ignores this in its own findings. Indeed, studies have reported a 30% decline in small stores in Argentina during the period of corporate retail expansion (Gutman 2002); a 20% decline in traditional food and beverage retailers in Chile in just four years (Faigenbuam et al 2002); a fall of 27.8% of market share for street markets in fruits and vegetables and 53.3% for open air dairy markets in Brazil (Farina 2002); etc.

Yet again, however, there are a few figures buried in this data that are disturbing. While the time-wise data is meaningless, the comparison of current conditions is not. The ICRIER study found a wide variation in the turnover changes of the retailers they surveyed – which one would expect, in a small sample scattered over a wide range of cities – but a comparison between those who were near corporate retail outlets and those who were not consistently showed higher losses in the former (p. 145, ICRIER 2009). The average change among those near corporate retailers was a decline of 10% per annum in both turnover and profits, as compared to a rise of 2% and 5% respectively among the control sample. In the sample near corporate retailers, a majority (58%) of those with losses reported that the biggest reason was competition from corporate retail – out of all the possible factors that could lead to a loss. Meanwhile, another study found that 71% of small retailers near a new corporate retailer experienced a fall in revenues (Kalhan 2007). This runs flatly contrary to all the claims being made about how existing corporate retailers have not harmed non-corporate ones.

Impact on Employment

On employment, consider the government’s claims. Commerce Minister Anand Sharma has predicted that FDI in retail will create one crore new jobs (CNN IBN 2011). When he was asked about where he got this figure from, he didn’t seem to have an answer. ICRIER does not agree with him; its own prediction is about 1.7 million jobs. But ICRIER doesn’t seem to know where its figure comes from, either. There appears to be exactly one figure in the entire 375 page study that is used to calculate employment generation – namely, that corporate retail “creates one job for every 350-400 sq ft of retail space” (p. 201, ICRIER 2009). But, again, the source of this figure is not cited.

Neither ICRIER nor Anand Sharma are known to be reticent about studies in their favour, so this is not reassuring. What is doubly suspicious is that, by definition, a net gain in employment can only be calculated by subtracting jobs that would be lost. But neither ICRIER nor Sharma even refers to this when making their declarations. By definition, a “transformation of the supply chain” and “elimination of middlemen” means that someone is losing existing employment. Indeed, even if one accepts all of of the government’s claims that there will be no impact on small retailers, clearly there will be a significant employment implication because of displacement of wholesalers, traders, and other “middlemen.” ICRIER doesn’t have much data on this phenomenon either; their study covered a grand total of 97 “intermediaries”, and admits that the findings are “more indicative than conclusive” (p. 127, ICRIER 2009 – though, in keeping with the rest of the study, ICRIER simultaneously states that they found no adverse effects on intermediaries even as they accept that there was an impact on both turnover and profits for some of them [p. 21]).

ICRIER does claim that there will be no major employment loss in small retailers. Once again, this is based on their “impact declines over time” claim, which in turn is based on circular logic. It also ignores the fact that many small retailers in their own sample reported using family labour, which by definition cannot be fired (and hence will not show up as an ’employment’ decline); but which can certainly experience underemployment or loss of income (Kalhan 2007).

Impact on “Consumers”

The hardest category to define, of course, is “consumer”, since pretty much everyone is a consumer. In this case, there is no consistent evidence of lower prices in corporate retailers in segments where they invest in “supply chains” (Gopalakrishnan and Sreenivasa 2009). The oft-mentioned “low price advantage” of Wal Mart is with reference to other corporate retailers in the US, not to non-corporate retailers in developing countries.

In India, ICRIER seeks to argue that “consumers” will benefit, especially “low income” consumers. What is their definition of “low income”? Those who earn less than Rs. 10,000 per month (the survey took place in 2007). This would put the majority of the residents of major urban centres in India in the “low income” category, so any discussion of benefits to “low income” consumers on this basis is statistically meaningless. Indeed, 33% of those in their sample who accessed corporate retailers used cars; this is a clear indicator of the kind of families that are being referred to.

Even within this highly skewed sample, ICRIER finds that on average 4% savings were reported from shopping at corporate retailers, especially by “low income” households (up to a maximum of 8% for those who shopped at “discount stores”). Even if this is correct, it hardly seems an enormous gain. Besides, one has to see this in the context of the fact that every corporate retailer lists “low prices” as among their strategies for market penetration. Corporate retailers, unlike small ones, can easily engage in “price flexibility” strategies. For instance, one or a few products may be “loss leaders”, priced low in order to draw customers in; offering discounts on some products by pushing the cost of the discount on to the farmer or original producer; and opening entire shops (including the “discount stores”) that may be loss making in order to penetrate new areas[iii].

The Question of “Safeguards”

Many of those who advocate corporate retail and FDI, but who are concerned about their adverse consequences, suggest that the way out is “government regulation” to ensure that the adverse impact is minimised. For instance, one commonly mooted proposal is that farmers’ cooperatives should be set up to enhance bargaining power with corporate retailers, and that regulations should be put in place to restrict the number of outlets of corporate retailers. ICRIER, incidentally, does not even go this far; it suggests “self-regulation” as the best alternative.

The problem with the “government regulation” proposal is that it does not take into account political realities. There is no reason to believe that a state machinery that has failed entirely to respond to the marketing, land and credit requirements of small and marginal farmers, small traders, and the poor will suddenly start doing so because of the entry of corporate retail. The best evidence that it will not do so is in fact the FDI policy itself. If indeed those supporting this measure were supportive of the interests of these segments, surely the safeguards and required steps should be put in place first?

Instead, we find the FDI policy being pushed through. Only one reason has been cited for this: the financial and corporate sectors are complaining of a “policy paralysis” in the government. In short, the policy itself is purely the result of pressure from these groups, and not of any rational or democratic planning process. But supporters now expect this government to regulate precisely these forces, when they have already shown that they can dictate policy?

The simple reality is that FDI in retail will not address any of the existing problems in the Indian economy and will make a number of them far worse – including lack of market access for small farmers, the repression and extortion of small traders, the plight of agricultural and urban workers, and so on. The government’s own data demonstrates this, and would be clearly seen to do so if it were not for the flood of motivated propaganda in favour of the policy.

References

Business Standard (2007). “Govt appoints ICRIER for retail study”, Business Standard, February 28.
Joseph, Mathew, Nirupama Soundararajan, Manisha Gupta, and Sanghamitra Sahu (2008). Impact of Organized Retailing on the Unorganised Sector. Working Paper 222, Indian Council for Research on International Economic Relations (ICRIER), September.

Gutman, Graciela (2002). “Impact of the Rapid Rise of the Supermarket System on Dairy Products Systems in Argentina”, Development Policy Review. Oxford: Blackwell Publishing, Vol. 20:4.

Indian Council for Research in International Economic Relations (2009). Retail in India: A Critical Assessment, New Delhi: ICRIER.

Joseph, Mathew, Nirupama Soundararajan, Manisha Gupta, and Sanghamitra Sahu (2008). Impact of Organized Retailing on the Unorganised Sector. Working Paper 222, Indian Council for Research on International Economic Relations (ICRIER), September.

Kalhan, Anuradha (2007). “Impact of Malls on Small Shops and Hawkers”, Economic and Political Weekly, June 2.

National Labour and Economic Development Institute (NALEDI) (2001).“Work Re- organisation and Industrial Relations in the Retail Industry”, unpublished manuscript.

6 thoughts on “FDI In Retail – What Does the Government’s Own Data Say? Shankar Gopalakrishnan”

Ah! In that case you must read the parliamentary committee report on Foreign and Domestic Investment in Retail Sector. What a joke. Really hilarious stuff that. The committee was chaired by Dr. Murli Manohar Joshi and the report was presented to the house in 2009. I have a copy which I can mail, if anyone is interested in a good laugh.

though everyone is serious in their cry for and against fdi in retail none seemed interested in checking out its alternatives-afterall our economy do need reforms ,we can’t sustain like this for long.so whats the way out.i would like to see some constructive arguments